The Value-Added Tax Act No 89 of 1991 (“VAT Act”) contains certain rules in Section 8(25) to provide for Value-Added Tax (“VAT”) relief by treating the supplier and the recipient of goods or services as the same taxpayer during corporate reorganisation transactions (“Restructuring Transactions”) as provided for in Part III of the Income Tax Act No. 58 of 1962 (“ITA”). The effect thereof is that the Restructuring Transaction is concluded on a tax-neutral basis.
Prior to the amendment of section 8(25) of the VAT Act, a farm (fixed property) could only be transferred on a VAT-neutral basis by the transferor (owner of the farm) to the transferee (recipient of the farm), if the supply of the farm forms part of a going concern under the Restructuring Transaction. The effect is that the farm could only be transferred by the transferor where:
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The parties to the Restructuring Transaction agree in writing that the enterprise (consisting of the farm operation) will be an income-earning activity that is capable of separate operation; and
- The assets which are necessary for carrying on such enterprise (farming activities) are also transferred by the transferor to the transferee in contemplation of the Restructuring Transaction.
These requirements created an anomaly as the transferor could only transfer the farm to the extent that there is a lease agreement over the farm that is a vatable supply, or all the assets are also transferred to the transferee. No provision was made where a taxpayer intends to transfer its farm (from its operations company) to a property holding company and subsequently lease the farm to the said operations company.
In addressing this anomaly, section 8(25)(iii) was inserted in the VAT Act. Section 8(25)(iii) provides VAT relief to group companies in instances where a farm (without its operational assets) is transferred in terms of sections 42 (Asset-for-share transactions) or 45 (Intra-group transactions) of the ITA, provided that the farm be leased back by to the transferor from the transferee after the transfer of the farm.
To rely on the relief of section 8(25)(iii) of the VAT Act the following requirements must be met:
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The transfer of the farm is done pursuant to sections 42 or 45 of the ITA;
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Both the transferor and the transferee must be registered for VAT; and
- Upon the transfer of the farm to the transferee, the transferor should lease the farm from the transferee.
Upon the Restructuring Transaction being concluded successfully, no VAT or income tax is trigged and the transferee will not be required to account for transfer duty as the Restructuring Transaction is exempt from transfer duty per section 9(15A)(a) or section 9(1)(l) of Transfer Duty Act No. 40 of 1949, depending on the circumstances.
Similarly, the same will apply to a Restructuring Transaction where a commercial property is transferred in contemplation of sections 42 or 45 of the ITA.